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  • Writer's pictureHugo Crema

Brazil: new regulatory framework for investment funds. CVM Resolution n. 175.

See below an analysis of the changes brought by the resolution




On December 23, 2022, the Brazilian Securities and Exchange Commission published CVM Resolution 175, which establishes a new regulatory framework for the constitution and operation of investment funds. The resolution modernizes the regulatory framework for investment funds, incorporating innovations arising from the Economic Freedom Act of 2019.


The resolution was the subject of public hearings in 2020 and 2021. With broad social participation, the process of discussion of the regulatory text sought to bring the local market closer to the practices of international markets, in addition to optimizing the regulatory stock (with 38 revoked regulations) and consolidating the decisions of the CVM's own collegiate body.


Among the several regulatory changes presented, we have articles about the limited liability of shareholders, the joint liability of the administrator and manager, the duty of information of the fund, the constitution of multiple share classes, the asset classes that can compose the fund, as well as investments abroad.


The text of CVM Resolution 175 will come into effect on April 3, 2023, and establishes other deadlines for specific articles. The adaptation of existing funds must occur until December 31, 2024, with the exception of FIDC and FIDC-NP, which must be adapted by December 31, 2023.


Below we have translated into English the news from the Coin Telegraph website that explains the impacts of CVM resolution 175.


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Brazil: Experts approve new CVM Resolution and say it will benefit the country's Bitcoin market


The new Resolution No. 175 of the Brazilian Securities and Exchange Commission (CVM), published on 12/23/2022, modernizes the regulation of Brazilian investment funds and incorporates the innovations introduced by the Economic Freedom Law (Law No. 13,874/2019), according to Cescon Barrieu partner, Julia Franco.


The new rules take effect on April 3, 2023, initially replacing CVM Instructions No. 555/2014, regarding liquid funds, and 356/01, of Credit Rights Investment Funds (FDICs).


“Market agents have long been waiting for CVM Resolution No. 175. It is the result of over two years of discussions and interactions between the regulator and the investment fund industry,” explains Julia Franco.


The Authority has stated that other categories of investment funds (such as Real Estate Funds (FIIs) and Share Investment Funds (FIPs), among others) will receive their specific Normative Annexes before Resolution No. 175 takes effect. In addition, CVM has indicated that it is working and will announce a project to modernize the information system between investment funds and the regulator.


Among the changes brought about by the Resolution, lawyers highlight the possibility of assigning limited liability to shareholders. Also, the norm regulates the treatment for each class of quotas regarding solvency, with the possibility of declaring insolvency in one of the classes of quotas and maintaining the normal operation of other classes within the same fund.


"In addition, the regulation must define whether the fund will issue quotas in a single class or whether it will have different classes of quotas, which will have their own Corporate Registration (CNPJ) and will constitute a segregated portfolio, with different rights and obligations. The same fund may issue classes of different types, as long as they belong to the same normative annex of the Resolution”, explains Julia.


New CVM regulations


The responsibilities of the so-called essential service providers are also specified and divided between the fund’s custodian and the investment fund’s manager. They have joint responsibilities of constituting the fund and drafting its internal rules, in addition to implementing procedures in case of negative net worth.


On the other hand, the competence to hire and pay other service providers will be split. From now on, the manager may hire services related to management activities.


Other points of the text also regulate conflicts of interest of shareholders, a more explicit prohibition of insider trading, and the issuance of quotas with authorized capital limits.


While drafting the resolution, another much-discussed establishes that the funds or classes of quotas may have a denomination referencing ESG. The rules of the fund offering these quotas must include certain information, such as the expected ESG benefits; the methodologies, principles, and guidelines for the ESG classification; which institution, if any, will certify this classification and how they will do so; and who will be responsible for disclosing the ESG results of the fund, etc.


The approach used by the CVM was well-balanced: it grants the authority regulatory leverage so that it can curb greenwashing practices without being overly prescriptive – which would certainly, and undesirably, discourage the industry,” explains Julia.


Cryptocurrencies, Financial Funds, and Credit Rights

Experts point out that, among the main innovations, are those related to Financial Investment Funds (FIFs), which include equity, foreign exchange, multi-market, and fixed-income investment funds (until then regulated by CVM Instruction No. 555/14).


If a Financial Investment Fund’s investment policy allows the acquisition of assets from a single issuance of securities, it is not subject to the concentration limits by issuer or by type of assets. Those securities must be issued by a publicly-held company and subject to a public offering.


Another innovation is the permission to increase the percentages by type of financial asset when the portion above the ordinary limit is composed of assets that have a market maker,” says the lawyer.


From now on, Financial Investment Funds or their classes may invest their entire equity in financial assets based offshore. This is possible as long as they invest through funds or investment vehicles incorporated offshore, intended for the general public, and which do not allow negative net worth (or that require additional investments to cover any loss). They must also comply with other requirements related to risk management, liquidity management, and asset concentration rules.


The funds will also be able to invest directly in environmental assets (carbon and decarbonization credits) belonging to regulated markets and in crypto assets traded in platforms authorized by the Central Bank or by a supervisor abroad.


These assets are now expressly considered financial assets, equaling all other local assets for the purposes of portfolio composition, even if they are traded abroad. Before the new rule, investment was already possible, even directly as long as within the limit of offshore investment and if certain requirements were met. Now the permission is clearer and expanded by allowing crypto assets traded on regulated exchanges in the country, ” explains Julia.


The CVM also established rules and limits on exposure to capital risk in relation to equity (leverage) for quotas targeted at the general public. These limits may not apply only to classes of quotas targeted at qualified investors.


Regarding Credit Rights Investment Funds (FIDCs), the main innovation was the possibility for the general public to invest in them (retail investing). These investments must meet stricter requirements than investments in classes for qualified investors. The Resolution also determines the expansion of the operations of Credit Rights Investment Funds (FIDCs) for all sectors of the economy, in addition to the expansion of the list of credit rights.


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